In 2012, the European Central Bank defined virtual currency as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community".[2]:13

In 2013, Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury, in contrast to its regulations defining currency as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance", also called "real currency" by FinCEN, defined virtual currency as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency". In particular, virtual currency does not have legal tender status in any jurisdiction.[3]

In 2014, the European Banking Authority defined virtual currency as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically".[4]

In a 2013 congressional hearing on virtual currencies, Ben Bernanke said they "have been viewed as a form of 'electronic money' or area of payment system technology that has been evolving over the past 20 years", referencing a 1995 congressional hearing on the Future of Money before the Committee on Banking and Financial Services.[5]
The Internet currency Flooz was created in 1999.[6] The term "virtual currency" appears to have been coined around 2009, paralleling the development of digital currencies and social gaming.[7]

The IRS decided in March 2014, to treat bitcoin and other virtual currencies as property for tax purposes, not as currency.[12][13] Some have suggested that this makes bitcoins not fungible—that is one bitcoin is not identical to another bitcoin, unlike one gallon of crude oil being identical to another gallon of crude oil—making bitcoin unworkable as a currency.[14] Others have stated that a measure like accounting on average cost basis would restore fungibility to the currency.[14]

This type of currency has been known for a long time in the form of customer incentive programs or loyalty programs. The first known coupon in history is probably from the US, attributed to Asa Candler, inventor of Coca-Cola and the free drink coupons in 1887, followed by C. W. Post's one-cent-off coupon in breakfast cereal boxes in 1895, both to drive sales. The business issuing the coupon functions as a central authority.[15][dubious – discuss] Coupons remained unchanged for 100 years until new technology enabling credit cards became more common in the 1980s, and credit card rewards were invented. The latest incarnation drives the increase of internet commerce, online services, development of online communities and games. Here virtual or game currency can be bought, but not exchanged back into real money. The virtual currency is akin to a coupon. Examples are frequent flyer programs by various airlines, Microsoft Points, Nintendo Points, Facebook Credits and Amazon Coin.

FinCEN defined centralized virtual currencies in 2013 as virtual currencies that have a "centralized repository", similar to a central bank, and a "central administrator".

A decentralized currency was defined by the US Department of Treasury as a "currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort".[3] Rather than relying on confidence in a central authority, it depends instead on a distributed system of trust.[16]

Digital currency is a particular form of currency that is electronically transferred and stored, i.e., distinct from physical currency, such as coins or banknotes. According to the European Central Bank, virtual currencies are "generally digital", although their enduring precursor, the coupon, for example, is physical.[2]

A cryptocurrency is a digital currency using cryptography to secure transactions and to control the creation of new currency units.[17] Since not all virtual currencies use cryptography, not all virtual currencies are cryptocurrencies. Cryptocurrencies are generally not legal tender. Ecuador is the first country attempting a government run digital currency -no cryptocurrency; during the introductory phase from Christmas Eve 2014 until mid February 2015 people can open accounts and change passwords. At the end of February 2015 transactions of electronic money will be possible.[18][19]

The money matrixadapted from an ECB work, Virtual Currency Schemes[2]:11

In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date commonly referred to as a BitLicense.[23] Unlike the US federal regulators it has gathered input from bitcoin supporters and the financial industry through public hearings and a comment period until October 21, 2014 to customize the rules. The proposal, per NY DFS press release "… sought to strike an appropriate balance that helps protect consumers and root out illegal activity".[24] It has been criticized by smaller companies to favor established institutions, and Chinese bitcoin exchanges have complained that the rules are "overly broad in its application outside the United States".[25]